Pearson Etext For Foundations Of Finance -- Combo Access Card (10th Edition)
10th Edition
ISBN: 9780135639344
Author: Arthur J. Keown, John D Martin, J. William Petty
Publisher: PEARSON
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Textbook Question
Chapter 10, Problem 30SP
(Size-disparity problem) The D. Dorner Farms Corporation is considering purchasing one of two fertilizer-herbicides for the upcoming year. The mom expensive of the two is better and will produce a higher yield. Assume these projects are mutually exclusive and that the required
- a. Calculate the
NPV of each project. - b. Calculate the PI of each project.
- c. Calculate the
IRR of each project. - d. If there is no capital-rationing constraint, which project should be selected? If there is a capital-rationing constraint, how should the decision be made?
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Please answer the following questions using the information below:
NPV. Using a 10% required rate of return, calculate the NPV for this project. Should it be accepted or rejected?
PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?
Consider the following cash flows:
Year 0 1 2 3 4 5 6
Cash Flow -$8,000 $3,000 $3,600 $2,700 $2,500 $2,100 $1,600
Payback. The company requires all projects to payback within 3 years. Calculate the payback period. Should it be accepted or rejected?
Discounted Payback. Calculate the discounted payback using a discount rate of 10%. Should it be accepted or rejected?
IRR. Calculate the IRR for this project. The company’s required rate of return is 10%. Should it be accepted or rejected?
NPV. Using a 10% required rate of return, calculate the NPV for this project. Should it be accepted or rejected?
PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?…
Consider two investment projects, which both require an upfront investment of $9 million, and both of which pay a constant positive amount each year for the next 9
years. Under what conditions can you rank these projects by comparing their IRRS?
(Select the best choice below.)
O A. There are no conditions under which you can use the IRR to rank projects.
O B. Ranking by IRR will work in this case so long as the projects' cash flows do not decrease from year to year.
O C. Ranking by IRR will work in this case so long as the projects' cash flows do not increase from year to year.
O D. Ranking by IRR will work in this case so long as the projects have the same risk.
You are choosing between two projects. The cash flows for the projects are given in the following table ($ million):
Project
Year 0
Year 1
Year 2
Year 3
Year 4
A
−$51
$25
$19
$19
$17
B
−$98
$19
$40
$51
$60
a. What are the IRRs of the two projects?
b. If your discount rate is
4.8%,
what are the
NPVs
of the two projects?
c. Why do IRR and NPV rank the two projects differently?
Chapter 10 Solutions
Pearson Etext For Foundations Of Finance -- Combo Access Card (10th Edition)
Ch. 10 - Why is capital budgeting such an important...Ch. 10 - What are the disadvantages of using the payback...Ch. 10 - Prob. 4RQCh. 10 - What are mutually exclusive projects? Why might...Ch. 10 - Prob. 6RQCh. 10 - When might two mutually exclusive projects having...Ch. 10 - Prob. 1SPCh. 10 - Prob. 2SPCh. 10 - Prob. 3SPCh. 10 - Prob. 4SP
Ch. 10 - (NPV, PI, and IRR calculations) Fijisawa Inc. is...Ch. 10 - (Payback period, NPV, PI, and IRR calculations)...Ch. 10 - (NPV, PI, and IRR calculations) You are...Ch. 10 - (Payback period calculations) You are considering...Ch. 10 - (NPV with varying required rates of return)...Ch. 10 - Prob. 10SPCh. 10 - (NPV with varying required rates of return) Big...Ch. 10 - (NPV with different required rates of return)...Ch. 10 - (IRR with uneven cash flows) The Tiffin Barker...Ch. 10 - (NPV calculation) Calculate the NPV given the...Ch. 10 - (NPV calculation) Calculate the NPV given the...Ch. 10 - (MIRR calculation) Calculate the MIRR given the...Ch. 10 - (PI calculation) Calculate the PI given the...Ch. 10 - (Discounted payback period) Gios Restaurants is...Ch. 10 - (Discounted payback period) You are considering a...Ch. 10 - (Discounted payback period) Assuming an...Ch. 10 - (IRR) Jella Cosmetics is considering a project...Ch. 10 - (IRR) Your investment advisor has offered you an...Ch. 10 - (IRR, payback, and calculating a missing cash...Ch. 10 - (Discounted payback period) Sheinhardt Wig Company...Ch. 10 - (IRR of uneven cash-flow stream) Microwave Oven...Ch. 10 - (MIRR) Dunder Mifflin Paper Company is considering...Ch. 10 - (MIRR calculation) Arties Wrestling Stuff is...Ch. 10 - (Capital rationing) The Cowboy Hat Company of...Ch. 10 - Prob. 29SPCh. 10 - (Size-disparity problem) The D. Dorner Farms...Ch. 10 - (Replacement chains) Destination Hotels currently...Ch. 10 - Prob. 32SPCh. 10 - Prob. 33SPCh. 10 - Why is the capital-budgeting process so important?Ch. 10 - Prob. 2MCCh. 10 - What is the payback period on each project? If...Ch. 10 - What are the criticisms of the payback period?Ch. 10 - Prob. 5MCCh. 10 - Prob. 6MCCh. 10 - Prob. 7MCCh. 10 - Prob. 8MCCh. 10 - Prob. 9MCCh. 10 - Determine the IRR for each project. Should either...Ch. 10 - How does a change in the required rate of return...Ch. 10 - Caledonia is considering two investments with...
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